While a student can use both income share agreements (ISAs) and loans to finance their education, they are two separate concepts. Income share agreements have built in protections that help the consumer during economic hardship.  There’s also no obligation to pay back the full amount funded. However, there is a chance to pay back more than was funded if you have a higher than average income. This is different from loans, which have a steady payment throughout their term when making on-time payments. Loans also continue to accumulate interest over time, even during economic hardship. This can cause people to stay in a cycle of debt if they are not able to pay the loan back.

What is an Income Share Agreement (ISA)?

An income share agreement is a financing tool that utilizes a person’s ability to pay, instead of interest. In exchange for funding, a person pledges a certain percent of income for a set period. For example, a person may receive $7,000 in exchange for 4% of their income for 5 years. That means they will be responsible for paying that 4% every month, including if their income goes up or down. Most ISAs also allow for consumers to stop paying if they are below a certain income threshold (around $20,000 per year). This ensures that they only make payments when they can afford to do so and does not penalize them for having a low income. ISAs will also include a payment cap, so if the consumer earns a great job after taking out the ISA, they will not have to pay an extravagant amount more than they were funded.

Differences Between Income Share Agreements and Loans

As mentioned before, income share agreements have built in protections for the consumer when they fall into tough economic times. If the consumers income falls below a certain annual threshold, then they are not responsible for paying anything. This also prevents interest from accumulating. With a loan, a person may be able to defer their payments or enter forbearance if they are not able to pay. However, the loan still accumulates interest and that person is now responsible for paying even more money back. If a person has a high paying job, then they may end up paying more than they would with a loan. The borrower would be responsible for sharing their income up until they reach a cap determined by the ISA provider.

Income share agreements also have no obligation to pay back the entire amount that was funded to income sharer. This means that if someone took out an ISA for $10,000, they don’t have to pay back the entire amount. If they struggle to find a job or have a low paying job during their ISA term and the payment term ends, they’re off the hook. This is unlike a loan, where one always have to pay back the principal, plus any interest that has accumulated. This is one of the biggest advantages of using an ISA over a loan.

Income share agreements also have a variable payment, which will fluctuate with income. This can happen with a variable rate loan, but the change may not be as drastic as with an ISA. If an income sharer has a large swing in income, then their ISA payment could change drastically. The monthly payment can be as low as $0, but will never be more than a small percent of one’s monthly income.

Of course, federal student loans will have some protections that other loans don't. They have deferment, forbearance, and even have income-driven repayment plans to help those that are struggling to make repayment. This may seem similar to an ISA, but there is still interest tied to these programs that will build up over time.

How do I get an Income Share Agreement?

At the moment, there are few options on the market to receive an ISA. One option is to go to one of the few schools in the country that offer this product, but what if you do not want to go to any of those schools? If you’re from a low-income community, some non-profit organizations currently offer select students with an opportunity to get funding through an ISA, but they can only offer them to a select amount of people. At the moment, Defynance has an option for people looking to refinance their existing student loans.

When trying to pay for school, it can be difficult to do so while staying within the guidelines of Islamic Finance. You want to avoid interest, but school is expensive and you don't see any other ways to finance your education. However, there now may be an option for you. With the rise of income share agreements lately, you may be able to avoid interest and still be able to pay for school. Or if you have existing student loans and want to avoid the interest on them, ​Defynance​ has an option for you too. But, is an income share agreement halal?

What is Halal. Are Loans Halal?

In Arabic, ​Halal​ is a word that means lawful or permitted. In the context of Islam, it refers to what is permitted according to Islamic Law. It's most often referred to in terms of what food can be consumed and how it must be prepared. However, it applies to a range of daily life to life tasks and provides guidelines for them. There is an entire category of finance called Islamic finance that follows the rules set in Islamic Law. In Islamic finance, the term Riba is used to refer to interest, which is deemed to not follow the guidelines and is thus not Halal. In Islam, Riba is seen as unjust or exploitative to people. Therefore, most Muslims will try to avoid any student loans, because they have an interest rate.

What is an Income Share Agreement?

Income share agreements, or ISAs for short, are a way to finance loans without the burden of interest. Instead of paying back debt with interest, you pay a percentage of your income over a period of time. In an ISA, payments will fluctuate with a person's income as it grows or falls. And in our case, if you ever make under $25,000 a year, you aren't responsible for making any payments until your income gets back above that point. An ISA aligns our goals with yours, because when you succeed, we succeed. We like to think of our agreements as a partnership. 

Income share agreements also have other protections, like a payment cap. If you share your income and get a huge raise, you could end up paying a lot. However, the payment cap prevents this. The cap is the max that you will ever pay and it's there to prevent those who are doing well from paying too much. It's not expected that you'll hit the cap, but you shouldn't have to worry about paying too much either.

Is an Income Share Agreement Halal?

A major aspect of having student loans is the interest that accumulates over time, therefore falling outside the Islamic guidelines. After gathering an expert opinion on the Islamic Finance guidelines, we have made sure our program follows Islamic guidelines and is Halal. When your student debt is refinanced with our ISA program, the aspect of interest is removed. Instead, you'll pay a percent of income for a period of time until you fulfill all your payments.

Our ISA program also let's you own a share of your ISA, giving you skin in the game. At the beginning of the ISA, you will pay 5% of your funding amount in order to become an owner of the income share agreement. This means that you will get a percentage of all the payments that you make. At the end of your ISA term, you will get all the payments that have accumulated over time as a joint-owner. 

Where can I get an Income Share Agreement?

​Defynance​ currently offers income share agreements to refinance student loans. If you have student loans and want to get rid of the interest that's accumulating each month, you can apply for our program ​here​. 

In recent years, income share agreements (ISAs) have been touted as an alternative to college loans. The people pushing for this change claim that they are more balanced in risk vs reward for the person pursing a college degree. While that may be true, many critics claim that they are often more expensive and just a predatory loan with a new name. They argue that an ISA is more expensive than just using a traditional loan, but is that really the case?

ISA's aren't loans

It's hard to compare apples to oranges. While both ISAs and loans are used to help with funding, especially for college, the way they work and are repaid is extremely different. These differences lead to confusion about what an ISA can cost someone in the end.

The biggest difference between an ISA and a loan is that an ISA is not based off of interest. ISA payments are tied to a percent of your income, so the cost will be variable and the total amount paid will be unknown. With a loan, you have a principal balance and an amount of interest that accrues, so you know how the total will change day to day. However, the ISA accounts for changes that may make you unable to pay by pegging the payment to your income.

Another difference between the two is that ISAs define the payment term and you know that you will never be in the contract longer than a certain amount of time, even if you can't make payments. In a loan, if you can't make payments, the balance will continue to rise until you are unable to ever pay it back. With an ISA, your obligation will end after a set time, even if you don't repay the original amount given to you. 

ISA Cons

Like most things, ISAs aren't perfect and have flaws. It is true that you could pay more with an ISA, but that entirely depends on your situation. If you are successful in your career and your income rises at a fast rate, then you may pay more than you would have with a loan. However, most ISAs also have a built in payment cap. This payment cap, normally up to 2.5x the amount funded, ends your ISA immediately if you reach the amount. It can protect you from paying astronomical amounts if your income really goes up. 

Another downside of an income share agreement is the uncertainty it presents. With a loan, you know of the interest rate, the expected monthly payment, and the term. When you use an ISA, because your payments and income fluctuate, you aren't always sure how much you will end up paying. However, you are certain about the max amount of time it will take. And you can take solace in the fact that your payments will always be affordable. 

ISA Benefits

But income share agreements are still beneficial. The greatest benefit is that payments are always affordable. Because they are just a small percent of your income, you know you can make your payment each month. In fact, most income share agreement programs include a minimum level of income of periods. If your income ever fall below such a minimum level, you will enter deferment and not be responsible to make any payments. You also don't have to worry about interest building up and a growing balance during these periods of nonpayment. 

Your payments scale with income. So early on they're cheaper than later on, when your income grows. This makes your payments affordable in the part of your life when you need it most. You can think of this as back-loading your contract to pay more when you're earning more and save money upfront. 

We talked about how you can pay more with an ISA, you could also pay less than you would with a loan. Again, if your situation allows for it, you can save money with an ISA. This will, of course, depend on your individual situation. However, if your income doesn't grow at a crazy rate, your payments won't grow that much either and ultimately, your payments will be less than with a loan. There's even special cases where you won't pay anything through an entire ISA. It depends completely on your unique situation.

Final Thoughts on ISAs being more expensive than a loan

While ISAs have their benefits and their cons, they can still be a great option for many people. ISAs can also be designed to be predatory. That's why it's important to look at the details. While an ISA could be more expensive than a loan, it depends on your situation and what happens to your income over time. If you do really well in life, you would end up paying more in an ISA than a normal loan, but it means you're doing well in life. An ISA can balance the risk and reward of funding by making sure payments are always affordable.

This article was written by ​Defynance​, a company that specializes in providing ISAs in order to refinance student loan debt. 

On the surface, ​income share agreements​ (ISAs) may look a lot like income-based repayment (IBR) programs offered by the government. They both allow you to make payments based on a percentage of your income. However, if you dig a little deeper, you'll notice that the two products can be vastly different. But, how do ISAs differ from income-based repayment?

How ISAs and IBR are used

Income-based repayment plans are part of federal funding loans, thus having limits on how much can be borrowed. For undergraduates, students are only able to borrow up to ​$57,500​ over the course of their studies. This includes yearly limits of up to $12,500. But sometimes this still isn't enough to cover education costs. 

On the other hand, ISAs don't have a limit on how much you can use. At least not by law. Some schools do limit the amount that a student can borrow, but this is all at the school level. Still, the annual limits for some of these programs are larger than the annual loan limit from the federal government.

Many ISAs at the school level are meant to supplement federal loans, not to be used in place of them. This allows a student to avoid private loans with high-interest rates. However, in some cases, ISAs replace loans entirely for students or programs that don't have access to federal funding.

How ISAs differ from income-based repayment

ISA and IBR programs both have payments based on income, but after that, they both look very different. Even though IBR payments are based on income, there is still an underlying loan with interest. If you aren't able to cover the interest building up with your payment, you will start seeing your balance grow over time. 

IBR is a loan, so if you fulfill the requirements and you have the rest of your loan forgiven, you still have to ​pay taxes on the amount forgiven​. Even though this is favorable to paying off the whole loan, it can cause a large one-time payment that you may not be ready for. This could cause you an even bigger headache as the IRS tries to collect the taxes.

On the other hand, income share agreements don't have a balance. Or interest. This means that you don't have an original amount that you will have to pay back. You just make your payments as a percentage of your income and once you complete your term, you're finished.

Regardless of whether you paid back the original balance or not. An ISA is completely dependent on your situation.

An ISA can have a wide range for the percentage of income that you pay, as opposed to IBR plans that are stuck at either 15% or 20% of income. The ISA percentage is based on multiple factors, including how much is funded, so the percentages can vary by a bit.

While IBR programs have some downfalls, these federal loans can still be less costly due to their low interest rate. Federal loans also have protections that other private loans don't have, such as deferment and forbearance that allow you to pause payments. 

If an ISA sounds like a favorable alternative to you, ​Defynance​ may be able to help you out. They can refinance existing student loans to an ISA for graduates who are working full time. You can apply for the program ​here​.

Income share agreements, or ISAs for short, have gained a lot of ground the last few months. This includes a number of proposed bills in congress. An ISA is a contract in which a person agrees to share a set percent of their income in exchange for an agreed upon amount of funding. With an ISA, the payments are tied to your income, so payments fluctuate as income changes. This allows your payment to always be affordable. Income share agreements have began to flourish due to unique features that can make them more fair than traditional funding sources. They have also come about due to a need for funding alternatives to student loans. The ISA ends after a set number of payments or a maximum period of time. 

ISA Protections

Income share agreements can be a great funding tool because they provide protections for people who are doing really well or those who are down on their luck. Income share payments automatically adjust with your income, so if your income falls or you lose your job, payments will fall. Most ISAs include a payment threshold, which is the minimum amount of income you need to make in order to make a payment. Under that amount, you aren't responsible for making payment. Another added benefit of ISAs comes from the fact that there isn't any interest. So if you are making lower payments or not making payments at all, you don't have to worry about interest building up. 

What if you're doing well in life? Wouldn't you end up paying way more than you typically would otherwise? Most ISAs also include protection from paying a lot more than a traditional loan with a payment cap. The payment cap is the maximum amount that anyone would pay in their ISA. The only time that someone will reach the payment cap is if they do really well in life, and in that case, they're doing well.

The Downside of income share agreements

So if an ISA has protection if you do well and if you don't do so well, where's the downside? There are a few negative aspects of ISAs to consider before going with one. If you do well in life, even with the upside protection, you would still end up paying more than you would with a loan in most cases. Of course, this also means that you have a higher income than average.

Income share agreements can also be confusing and have unclear regulations. With all new products, people aren't quite sure how to handle them legally. Many contracts follow best practices, but without regulation, some could be predatory. Many people also don't understand income share agreements completely, so they may be inclined to take one out that can hurt them. Be sure that you understand what the conditions are of an ISA before agreeing to one.

ISAs can be more tedious to work with than a traditional loan. With an ISA, you are expected to report any changes to your income. This will change your payment and your payment could fluctuate monthly. This is especially true if you have an hourly or commissions based job. ISAs also require you to submit your tax return each year in order to determine if the amount you paid is correct. If you underpaid by a large amount, then you will have to make that up on top of your monthly ISA obligation.

How some use ISAs today

Today, income share agreements are used in a variety of ways, but mostly at the college level. Some schools offer ISAs directly to their students as an alternative means of funding. Some coding bootcamps also offer ISAs in lieu of traditional tuition. For these bootcamps, they can't receive federal funding, so an ISA allows more access for low income individuals. 

College graduates can even refinance their student loans using an income share agreement. However, Defynance is the only ISA solution that currently does so. They refinance student loans for graduates working full-time.